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PRESS RELEASE

Background:
HOW SUSTAINABILITY GRADING PROMOTES CORPORATE
SOCIAL RESPONSIBILITY, ‘DUAL RETURN’ TO INVESTORS

Commentary from Carl M. Birkelbach,
Chairman and Chief Executive Officer,
Birkelbach Management Corp., Chicago

“Sustainability grading” is an increasingly popular tool to promote socially and environmentally responsible corporate performance.
Used by socially responsible investment firms and SRI units within mainstream firms, as well as by at least one major non-governmental organization, sustainability grading rates a company on how its core business (the products or services it offers) helps or harms society and the environment.
While results are still hard to measure, there’s evidence of increased attention from corporate managers as well as largely untapped investor interest.
Many academic studies – a number of them cited in the Social Investment Forum 2005 Report on Socially Responsible Investing Trends in the United States -- have noted the correlation between positive performance on corporate responsibility issues and financial performance. The objective is to give investors a dual return, financial as well as social and environmental.

Birkelbach Management Corp. also has found that maintaining a socially responsible portfolio is one of the best ways to ways to achieve long-range growth and at the same mitigate investment risk. Cumulative returns for both of BMC’s model SRI portfolios have consistently outperformed the S&P 500 in tests since the first quarter of 2004 and in back tests to January 1998. (Whereas some of the back-tested results are hypothetical, the more recent returns are actual.)

How Sustainability Grading Works
The typical sustainability grading system produces as many as five grades. The top one goes to companies whose core business is deemed a “sustainability solution,” with growth potential driven by environmental, social or government themes. Their equities stand to benefit as well, especially where the broader market hasn’t priced these trends into its assumptions.
One SRI fund identifies sectors that include such companies as “industries of the future.” Examples are renewable and more efficient energy, environmental services, health, knowledge, sustainable transport and water management. Most of these sectors outperformed the benchmark MSCI World index in most of the time periods observed from one to ten years through March 31, 2005.
The lowest ratings go to businesses that actually conflict with sustainable development. BMC is among those firms that on this basis excludes from its portfolios companies whose main products involve the manufacture of alcohol and tobacco, or are involved with gambling or weapons production.
Besides ranking product sustainability, one SRI fund provides a matrix that also ranks management quality with respect to social, environmental and governance issues from 1 (“clear vision of corporate responsibility and working to achieve it”) to 5 (“no cohesive management social, environmental and governance risks and challenges exist.”)
A key element of sustainability is “engagement,” meetings held with senior company management and with specialist managers who have responsibility for overseeing social, environmental and governance issues. Grading firms see engagement as one of the most effective ways to get these matters on the corporate agenda.
Typically, the firms hold regular follow-up meetings with companies to assess their response to recommendations and to report progress to clients. Continued failure to respond, despite dialogue with the company in question, may lead to voting the firm’s shares against management or dropping a company from the portfolio.
For example, Enron was unacceptable on the sustainability screening criteria of one grading firm. Dropping the stock helped the fund’s performance, while mainstream funds using traditional criteria held Enron and their portfolios suffered.
In a non-governmental organization initiative, Greenpeace ranked the sustainable seafood policies of United Kingdom supermarkets from 1 to 5, then gave them a chance to update and correct their information. When confronted with the sustainability grades, a number of supermarkets promised to make changes. Greenpeace continues to monitor their performance.

Engagements Promote Publicly Reported Action
The grading firms observe that engagements lead to action that is announced in the graded company’s sustainability report, published in the company’s annual report or separately, often on its Web site.
CorporateRegister.com offers access to some 11,000 corporate environment/social responsibility/sustainability reports from about 3,100 companies across more than 100 countries, dating back as far as 1990. Each week the register adds reports from companies publishing sustainability information for the first time.
Grading firms encourage companies to prepare the reports following guidelines of the Amsterdam-based Global Reporting Initiative, an official collaborating center of the United Nations Environment Program.
Europe sees itself as ahead of the United States in sustainability grading, in part because companies report more information on how they’re managing sustainability issues. One possible explanation is that there’s more fear in the U.S. of being sued for reporting inaccuracy – a tendency perhaps exaggerated by the recent federal Sarbanes-Oxley law.
In any event, sustainability grading by Europe-based firms of foreign multinationals, such as BP and Shell, includes U. S. operations.
One pacesetting example of sustainability grading’s impact on corporate behavior is that the Dow-Jones Sustainability Index is an indicator to determine compensation for the CEO of Westpac, one of the largest Australian banks. The DJSI includes only the top 10 percent of the companies graded by the investment firm that compiles it.

Investors Warm to SRI
One reason to believe that sustainability grading will continue to grow is public perception that SRI funds keep companies honest and products safer. More than half of Americans believe that:
• It is very important that socially responsible mutual funds use their interaction and investment practices to act more socially responsible.
• SRI mutual funds contribute significantly to product and environmental safety, corporate honesty, generating fairer wages for employees, reducing sweat shop labor conditions in Third World countries, and making it more likely that women and minorities will be hired and promoted.
Over half of U.S. investors who are not already into SRI funds are interested in investing in them. About three-quarters of Americans say that knowing that a company is ranked higher in social performance would make them more likely to invest in it and purchase more of its products and services. And more than half agree that socially responsible companies carry less risk and deliver better returns.
Yet, financial advisors often don’t give these investors an SRI option, hence the potential for growth in the firms that do. Any increase in sustainability grading should facilitate informed SRI choices.
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Carl M. Birkelbach is founder, chairman and chief executive officer of Birkelbach Management Corp., a Chicago-based money manager since 1974 and a registered investment advisor, and Birkelbach Investment Securities, Inc. (BIS). BIS is a securities broker-dealer since 1978, registered with the U.S. Securities and Exchange Commission and a member of FINRA, the leading private-sector provider of financial regulatory services. BIS provides safekeeping and execution services through its relationship with Pershing LLC, the world's leader in correspondent brokerage services.
He became known to the investment community as the “Lone Bull” by being one of the few stock market commentators who, in the sideways-moving market of the 1970’s and early 1980’s, foresaw the bull market of the rest of the 1980’s and 1990’s.

Mr. Birkelbach has applied his nearly 40 years of investment experience as author of "Stock Market Forecasting Through Charting” and editor of more than 500 BIS Investment Strategy Letters. He also has appeared frequently as a market commentator on television and radio news programs and as a quoted source in business/financial journals and periodicals.
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March 2006